The Logical and Rhetorical Problems With Student Loan Forgiveness

Editor’s Note: The following is an excerpt from The Problems with Student Loan Forgiveness, a new report from the Texas Public Policy Foundation that argues against universal and complete student loan forgiveness. This is the first in a series of six excerpts from the report.

Part 1: Logical and Rhetorical Problems With Student Loan Forgiveness

We begin with the logical and rhetorical problems of student loan forgiveness.

Advocates Overstate the Problem

The first logical problem is that loan forgiveness proponents overstate the problem. To start with, not all college students take out student loans. In fact, most undergraduate students do not take out student loans—63% to 74% depending on the year (College Board, 2021, p. 40). And of the students who do borrow, most use it to finance a lucrative investment in their career and can afford to repay their debt. Indeed over 80% of those who entered repayment in 2002 had fully repaid their loan 14 years later, and later cohorts of borrowers were on a similar repayment trajectory (Gibbs, 2017, p. 11).

Among those who borrow, repayment burdens are generally affordable. Beth Akers, a scholar at the American Enterprise Institute, notes that the

typical graduate will have borrowed $28,500 in pursuit of a bachelor’s degree. That can be repaid with monthly payments of $181 on a standard, 20-year repayment plan… By contrast, median earnings for that college-educated millennial would be $56,605 … [meaning loan payments would be] 4% of this family’s pretax, monthly income. (Akers, 2019a, para. 8–9)

Paying 4% of income (an income that is presumably higher than what the individual would have earned without a college degree) is eminently affordable and is not an existential threat to the finances of debt holders that would justify forgiving their loans in the name of relieving unaffordable debt.

The bottom line is that most students do not borrow, and even for those who do, the typical repayment burdens are reasonable, not a crisis warranting massive taxpayer-financed giveaways in the form of loan forgiveness.

But even if repayment burdens are reasonable for most, what if they are getting worse? There is considerable debate over whether student loan burdens have been getting worse over time. In their book Game of Loans, Beth Akers and Matthew Chingos (2017) argue that per student debt payments as a percent of income have been stable over time, meaning that student loans today are no less affordable than they were in the past.

But the pro-forgiveness side argues that the increase in college enrollment over time distorts the figures.

Households that would have appeared as “zeroes”—that is, not included—in the computation of the student debt burden distributions in the 1990s or the mid-2000s now enter those distributions with positive values for their debt burdens. Akers and Chingos condition on positive student debt to include households in their sample, but if they had instead conditioned on a given level or range of income or on a given educational attainment, they would have found that the distribution of debt burdens had shifted substantially to the right. (Fullwiler et al., 2018, p. 15)

Even if true, there are two counterpoints. First, the increased enrollment was presumably disproportionately made up of students from lower income families, who commonly borrow more than average to attend college since they are more liquidity-constrained (unless they disproportionately enroll in lower-cost colleges where there is less need to borrow). If increasing the number of high-needs borrowers does not increase the overall average, then other students would be facing a lower debt burden, undermining the argument that student debt is getting worse over time.

Second, the trend does not tell you much about current affordability. For example, suppose the price of toothpicks started doubling every year. The trend looks scary, but it could go on for many years before people would consider toothpicks unaffordable. Similarly, even supposing student loan debt burdens are getting worse over time (a contested claim) does not prove that the burden today is unaffordable.

Forgiveness Is Badly Targeted

Another logical problem with student loan forgiveness is that it is badly targeted. Advocates for loan forgiveness often rely on extreme examples of student debt gone wrong to make their case. Two mainstays are college dropouts who accumulated significant debt but earned no degree and graduate students who accumulated hundreds of thousands of dollars in debt.

These stories are real and tragic, and reforms should be implemented to ensure that such cases are eliminated or at least extremely rare. Yet these cases are also outliers. As noted earlier, over 80% of students repay their debt within 14 years (Gibbs, 2017, p. 11) and the most recent data show that 9.7% of students who entered repayment in 2017 defaulted within three years (U.S. Department of Education, n.d.-c).

Yet forgiveness advocates jump from these outlier cases to argue for universal forgiveness. The solution (universal forgiveness) simply does not match the problem (isolated cases of unaffordable debt). It would be like arguing that hurricanes pose a danger to states along the Gulf Coast and then devoting resources to hurricane proof non-coastal states like Montana. A better policy would focus resources on where the problem is concentrated.

Unaffordable student loan debt is a problem for some, but it is not the typical case and is nowhere near the universal experience, which implies that the appropriate policy response is more likely to involve scalpels than sledgehammers.

Existing and Better Solutions Are Ignored

The third logical problem is that forgiveness proponents too often ignore existing and alternative solutions.

Unaffordable student loan repayment burdens have been all but solved by policymakers over the past couple decades as a series of income-driven repayment programs (e.g., Revised Pay as you Earn [REPAYE]) were established. In these repayment programs, the borrower’s monthly loan payment is adjusted based on their current income. If a student’s income falls, so does their payment to ensure that payments are always affordable. These programs eliminate the possibility of default due to unaffordability and ensure that student loan payments are affordable for the entire lifetime of the student. If students are struggling with unaffordable payments, the solution is simple—enroll in an income-driven repayment plan. We want to emphasize that these income-driven repayment programs already have loan forgiveness built in—after making payments for a certain number of years (10–25 depending on the program), any remaining balance is forgiven.

In other words, income-driven repayment programs ensure that monthly payments are always affordable, and then forgive any unpaid debt after the student makes payments for a predetermined period of time. Universal and immediate loan forgiveness would reinvent the wheel, attempting to solve a problem that the income-driven repayment programs solved years ago. It should also be noted that in contrast to immediate and universal loan forgiveness, the loan forgiveness embedded in income-driven repayment programs is targeted to those students, and only those students, whose income was not high enough to repay their loans. While these income-driven repayment programs are not perfect, in part because their forgiveness provisions are too generous (Gillen, 2020), they are the best alternative to universal student loan forgiveness and have the advantage of already existing.

Targeted forgiveness would also be better than universal loan forgiveness (though we think significantly inferior to income-driven repayment). Shelbe Klebs writes that

instead of considering a blanket solution that gives an arbitrary amount of forgiveness to every single person, regardless of their ability to pay, Congress should commit to forgiving the entire balance of the loans held by those who have been enrolled in or received Supplemental Nutrition Assistance Program (SNAP), TANF, Medicaid, CHIP, EITC, housing assistance, Supplemental Security Income (SSI), and other key means-tested federal public assistance programs for at least three of the past five years. (Klebs, 2021, para. 8)

Matthew Chingos, a scholar with the Urban Institute, also thinks targeted forgiveness would be a better approach than universal forgiveness:

An alternative approach would be to use participation in means-tested federal benefit programs, such as Temporary Assistance for Needy Families (TANF), as a proxy for economic hardship, rather than household income… Forgiving all education debt for households that participate in public assistance programs would concentrate benefits on low- and middle-income Americans. (Chingos, 2019, para. 10-12)

Rhetoric Too Often Relies on Bad Reasoning

A fourth problem is the rhetoric that sometimes accompanies calls for student loan forgiveness, which often relies on strawmen to make the policy seem more reasonable. During the Occupy Wall Street protests, a common refrain was that if Wall Street was getting bailouts, why shouldn’t students? Yet, as Justin Wolfers noted,

notice the political rhetoric? Give free money to us, rather than “corporations, millionaires and billionaires.” Opportunity cost is one of the key principles of economics. And that principle says to compare your choice with the next best alternative. Instead, they’re comparing it with the worst alternative. So my question for the proponents: Why give money to college grads rather than the 15% of the population in poverty? (Wolfers, 2011, para. 9).

If your arguments only look good when matched against a strawman, then you do not have a very good argument. If a main argument for student loan forgiveness is that it would benefit the less well-off, it is trivially easy to find groups that are worse off than those with student loan debt.

Image: Mateusz Raczynski, Public Domain